The Volokh Conspiracy

Yesterday, I pointed out that even many of the liberal Supreme Court justices were skeptical of arguments that the individual mandate qualifies as a tax under the Anti-Injunction Act, and suggested that this was not a good sign for the federal government’s claim that the mandate is a tax authorized by the Tax Clause of the Constitution.

Today’s oral argument directly considered the constitutional tax issue, and at least three of the four liberal justices – Ruth Bader Ginsburg, Elena Kagan, and Sonia Sotomayor – remain skeptical. Sotomayor suggested that the government’s Tax Clause argument is flawed because it has no “limiting principle.” Ginsburg again contended that the mandate is not a tax because it isn’t a “revenue-raising” measure. And Kagan pressed the Solicitor General on why it should be considered “irrelevant” that “Congress determinedly said, this is not a tax.” Needless to say, the conservative justices were no more supportive of the federal government’s Tax Clause claim than the liberals.

I don’t know who is going to win on the Commerce Clause and Necessary and Proper Clause questions. The plaintiffs’ position is looking pretty good. Still, I would not be surprised if the federal government managed to pull it out. But I am now quite confident that the feds are not going to prevail on the Tax Clause.

If Kagan and Sotomayor do end up concluding that the mandate is not a tax, that will be consistent with the views of the president who appointed them.

Today’s Supreme Court oral argument transcript suggests that many of the justices, including at least three of the liberals, are skeptical of claims that the individual mandate is a tax. This is important not only for today’s argument about the applicability of the Anti-Injunction Act (which probably does not apply if the mandate penalty is not a tax), but to tomorrow’s argument about the constitutionality of the mandate. The federal government has argued that the mandate is constitutional because it is an exercise of Congress’ power under the Tax Clause. Lower courts have almost uniformly rejected this constitutional tax argument, and today’s questioning suggests that the Supreme Court is unlikely to accept it either.

Justice Stephen Breyer suggested that the mandate is not a tax because “Congress has nowhere used the word “‘tax.’” Justice Ginsburg noted that the mandate may not be a tax because it isn’t a “revenue-raising measure,” and because the monetary penalty is separable from the mandate itself. Justice Sotomayor also expressed doubts about whether the mandate is a tax, as did several for the conservative justices. As far as I can tell, none of the justices seemed to support the argument that the mandate is a tax.

Thus, today’s events do not bode well for the federal government’s constitutional tax argument. However, there are two caveats to this conjecture. First, the justices sometimes ask questions for rhetorical effect or play devil’s advocate. I don’t think they are doing so here, but obviously I can’t be sure. Second, it is theoretically possible that the constitutional definition of what qualifies as a “tax” is broader than the AIA definition. This is not the usual view of the matter. Indeed, the one lower court that ruled that the AIA applies to this case did so precisely because they thought that the AIA’s definition of “tax” is broader than the Constitution’s. However, it’s not completely impossible that the Court will reach the exact opposite conclusion, and the Solicitor General actually argued for such an approach today. However, there is no indication that the justices are leaning in that direction, or that any of them believe that the constitutional definition of a tax is broader than the AIA definition.

Even if the federal government loses on the tax argument, they could still win on the Commerce Clause or the Necessary and Proper Clause. The latter is probably their strongest point. Still, it’s interesting that the tax argument – which has attained great popularity among academic supporters of the mandate – has been overwhelmingly repudiated by the courts, including several judges who voted to uphold the law on other grounds. And it looks like the Supreme Court may well go the same as the lower courts on this issue.

The CNN website has just posted a column I wrote on the individual mandate case. Here’s an excerpt:

This week, the U.S. Supreme Court considers the case challenging the Obama administration health care plan’s requirement that most Americans purchase a government-approved health insurance plan by 2014. The court should rule that this individual mandate is unconstitutional. To do otherwise would give Congress almost unlimited power....

If Congress could use [the commerce] clause to regulate mere failure to buy a product on the grounds that such inaction has an economic effect, there would be no structural limits to its power. Any decision to do anything is necessarily a decision not to do something else that might have an economic effect. If I spend an hour sleeping, I thereby choose not to spend it working or shopping. As the lower court decision in this case explained, the government’s position “amounts to an argument that the mere fact of an individual’s existence substantially affects interstate commerce, and therefore Congress may regulate them at every point of their life.”

For readers who may be interested, I will be on C-SPAN’s Washington Journal from 8 to 8:30 AM tomorrow to talk about the upcoming Supreme Court oral argument on the Anti-Injunction Act, and whether or not it precludes the individual mandate lawsuit. The AIA issue is somewhat technical. But it does tie in to one of the key constitutional questions at stake in overall individual mandate litigation: whether the mandate is constitutional because it is actually a tax. Although the Fourth Circuit ruled otherwise, most lower courts have concluded that the AIA does not apply to the anti-mandate lawsuits because the mandate is not a tax as that term is defined in the Constitution.

I might have instead appeared on Washington Journal on Tuesday to talk about the main individual mandate oral argument. But unfortunately I will be at an international academic conference in Montreal that day – ironically a conference focused on the question of whether judicial review in federal systems promotes nationalization or decentralization.

Back in January 2010, I had the following post on the then-new DC Bag tax:

A new law recently went into effect in the District of Columbia, the “Anacostia River Clean Up and Protection Act of 2009″. The law does two things. First, it prohibits the sale or distribution of non-recyclable plastic bags in the District of Columbia at either the retail or wholesale level. Second, and more recognizably to consumers, it requires grocery stores and restaurants to charge customers 5 cents for each carryout bag the store provides. If you’re at a DC sandwich shop, for example, the shop will no longer automatically bag your sandwich. Instead, they’ll ask you if you want a bag: If you want a bag, you are charged 5 cents for it.

Here’s the language from Section 5(a) of the new law:
A fee of $.05 per recyclable paper and plastic carryout bag is hereby established for consumers making purchases from Retail Establishments.
(1) Fees must be paid by the consumer at the time of purchase.
(2) Retail Establishments may not pay the fee on behalf of consumers.
(3) All Retail Establishments shall indicate on the consumer transaction receipt the number of disposable carryout bags provided and the total amount of fee charged.

The idea behind the bag tax is that requiring an itemized 5 cent-per-bag charge will have an outsized impact on consumer behavior. Customers will use fewer bags and get in the habit of carrying a reusable bag with them, even though the actual fee is quite small. Notably, the law effectively prohibits stores from leaving out bags for customer: Each bag distributed needs to be noted and charged for individually, so the stores need to keep them behind the counter.

As you might guess, there’s also a revenue angle to the law. The stores keep 1 cent for each bag tax free and the remaining 4 cents goes into a government fund to clean up the Anacostia river. The government also can obtain fines from stores that violate the Act.

There are a lot different angles we could consider here, but I want to focus on the question of whether the law will work as planned. We have a lot of readers in and around DC. I’m curious, what’s your experience with the new law? Has it changed your bag use habits? Or if it hasn’t yet, do you think it will?

I asked that question when the tax was new, and I thought I would ask again to see how it has worked out. Readers in the DC area, has the law changed your bag use habits over the long term? And more broadly, has your view of the tax changed in the two years or so since the tax was enacted?

UPDATE: My colleague Lisa Fairfax recently had this useful post on studies that have been done to figure out the impact of the law.

Rob Natelson explains it all in his latest blog post. Short answer: if the purpose of the tax is raising revenue (e.g., the Stamp Act), it’s a tax. If the purpose is the regulation of commerce (e.g., a prohibitive tariff on imported French clothing; a shipping tax dedicated to paying for harbor improvements), then it’s not a “tax” in the the constitutional sense. Rather, it is a regulation of commerce.

The American colonists believed that Parliament had full authority to regulate external commerce, such as by imposing protectionist tariffs. The colonists also believed that Parliament had no authority to impose domestic taxes in the colonies (such as the Stamp Act). The colonists had a very firm sense of the distinction, and ended up going to war over Parliament’s refusal to respect that distinction. Because the Obamacare mandate is designed purely to control behavior, and not to raise revenue (even if it, like a protectionist tariff on French clothing does ultimately raise a little revenue), the Obamacare mandate is a type of commerce regulation, and not a tax in the constitutional sense. That, at least, is what the original meaning tells us.

Of course whether the individual mandate actually qualifies as a regulation of “commerce...among the several States” is a separate issue. The original meaning question for the mandate’s penalty is a commerce issue, not a tax issue.

On Thursday, the Fourth Circuit Court of Appeals issued two decisions dismissing challenges to the Obama health care plan’s individual mandate on jurisdictional grounds. All three judges on the panel were Democratic appointees, including two chosen by President ObamaNeither ruling reached the merits of the question of whether the individual mandate is constitutional. Virginia v. Sibelius is by far the better known case, because it was brought by the Virginia state government. But Liberty University v. Geithner is perhaps more interesting.

In the Virginia case, the Fourth Circuit dismissed Virginia’s challenge to the mandate because they ruled that the state lacked standing to challenge it. Virginia had based its standing on argument on the grounds that it had passed a state law exempting Virginians from being forced to buy health insurance. Normally, states automatically have standing to challenge federal laws that supersede their own legislation. But the Fourth Circuit ruled that the Virginia law was not a genuine exercise of state sovereignty, but merely a symbolic protest against the federal individual mandate. In my view, Virginia’s motives for passing the law should have been irrelevant to the question of how it affected standing. Moreover, a decision not to regulate is just as much an exercise of sovereign authority as a decision to impose a regulation. In addition, I think Virginia should also have gotten standing on entirely unrelated grounds. It could have taken advantage of the “special solicitude” for state governments that the Supreme Court established in Massachusetts v. EPA. Virginia probably erred in putting all of its standing eggs in one basket. It should have emphasized Massachusetts v. EPA as well as its anti-mandate law.

Be that as it may, this decision is unlikely to matter much in the long run. Even if the Supreme Court also rejects Virginia’s suit for lack of standing, there are lots of other anti-mandate plaintiffs – both state governments and individuals – who clearly do have standing, as the Fourth Circuit admits (at least in the case of the individuals). So the issue will get to the Supreme Court one way or another.

Liberty University v. Geithner is more interesting because it is the first court decision to endorse the federal government’s argument that the individual mandate is a tax. Up till now, that argument has been consistently rejected by every judge who has ruled on it, including several who concluded that the mandate is constitutional on other grounds. The majority opinion only ruled that the mandate qualifies as a “tax” as defined by the Anti-Injunction Act, which forbids court challenges to “taxes” prior to the time when the IRS tries to actually collect the money. According to the majority, the AIA defines taxes more broadly than the Constitution, and encompasses all fines that are collected by the IRS through the normal tax enforcement system. I think Judge Andre Davis’ dissenting opinion does a good job of rebutting this extremely broad interpretation of the AIA. And I think it likely that the Supreme Court will side with him and the other nine judges who have ruled the same way rather than with the Fourth Circuit majority. However, if the latter prevails, it could make it impossible for individuals to challenge the mandate until it takes official effect in 2014.

In a concurring opinion, Judge James Wynn goes further than the majority (which he also joined), and argues that the mandate is a tax not just under the AIA, but under the Constitution. He has thereby become the first of the eleven federal judges who have considered this question who endorsed the constitutional tax argument. The other ten judges (including Judge Davis) all concluded that the mandate is a regulatory penalty, not a tax. Obviously, if the federal government wins on this point, the mandate would be constitutional even if it is not authorized by the Commerce Clause or the Necessary and Proper Clause.

On balance, I think Wynn’s argument is wrong. For reasons I explain here, the federal government’s Tax Clause argument (which Wynn echoes) is unpersuasive:

As recently as 1996, the Supreme Court reiterated the crucial distinction between a penalty and a tax. It ruled that “[a] tax is a pecuniary burden laid upon individuals or property for the purpose of supporting the Government,” while a penalty is “an exaction imposed by statute as punishment for an unlawful act” or – as in the case of the individual mandate – an unlawful omission. The individual mandate is a clear example of a penalty, where Congress requires people to purchase health insurance, and then punishes them with a fine if they fail to comply.

In September 2009, President Obama himself noted that “for us to say that you’ve got to take a responsibility to get health insurance is absolutely not a tax increase.” He was right. If the mandate qualifies as a tax merely because it punishes violators with a fine, then Congress could require Americans to do almost anything on pain of having to pay a fine if they refuse. It could use this power to force citizens to buy virtually any product, including broccoli, General Motors cars, or anything else.

Even if the individual mandate does somehow qualify as a tax, it is not one of the types of taxes that Congress is authorized to impose. The Constitution gives Congress the power to enact several types of taxes: Excise taxes, duties and imposts, income taxes, and “direct taxes” that must be apportioned among the states in proportion to population.

No one, including the federal government, claims that the individual mandate is a duty or an impost. The individual mandate is not an income tax because an income tax must target some “accession to wealth,” in the words of Commissioner of Internal Revenue v. Glenshaw Glass Co., the leading Supreme Court case on the subject. The fine imposed by the mandate does not target any accession to wealth or flow of income. It simply forces individuals to pay a penalty if they disobey the federal government’s regulatory requirement. The fact that low-income individuals are exempted does not change this analysis. A fine for jaywalking would not become an income tax if low-income individuals were exempted from it.....

It is even more implausible to suggest that the mandate is an excise tax. Excise taxes apply to economic transactions or the use of property of some kind. For example, a tax on the sale of alcoholic beverages qualifies as an excise. The individual mandate does not tax any kind of activity, use of property or economic transaction....

If the mandate is not a tariff, impost, income tax, or excise tax, it is either a direct tax or no tax at all. And if it is a direct tax, it would be an unconstitutional one, because it is not apportioned among the states in proportion to population as the Constitution requires.

The Supreme Court may well end up endorsing the individual mandate, though the anti-mandate plaintiffs also have a real chance to win. If the pro-mandate side does prevail, it probably won’t be on the tax argument.

Today’s 2-1 Sixth Circuit Court of Appeals decision upholding the constitutionality of the individual mandate is undeniably a setback for mandate opponents. Up until now, judges’ votes in the mandate cases had split along ideological and partisan lines. Every conservative Republican judge had voted to strike it down, while every liberal Democrat voted to uphold it. Even in the Sixth Circuit, two of the three judges fit the same pattern (Judge Boyce Martin, and Judge Graham in dissent). But Judge Jeffrey Sutton, a well-known conservative judge has now become the first exception to it. Like Martin, he voted to uphold the mandate as an exercise of Congress’ powers under the Commerce Clause.

At the same time, Martin and Sutton’s opinions highlight a central weakness of the pro-mandate position in even more blatant form than previous opinions upholding the mandate. Their reasoning has extremely radical implications. Unlike previous decisions upholding the mandate, which ruled that failing to purchase health insurance is “economic activity,” Martin and Sutton conclude that Congress has the power to regulate inactivity as well, so long as the inactivity has some kind of “substantial” economic effect.

The Martin-Sutton approach thereby opens the floodgates to an unlimited congressional power to impose mandates of any kind. Any failure to purchase a product has some substantial economic effect, at least when aggregated with similar failures by other people. This is certainly true of failures to purchase broccoli, failures to purchase cars, failure to by a movie ticket, and so on. Even failure to engage in noncommercial activity nearly always has such effects. For example, a mandate requiring people to eat healthy food and exercise every day can be justified on the grounds that it would increase economic productivity and also increase the demand for healthy food products and gym memberships. The district court rulings in favor of the mandate all embraced some version of the “health care is special” argument [or at least the argument that not purchasing health insurance is "economic activity"] in order to avoid this slippery slope problem (albeit, unsuccessfully, in my view). By contrast, Martin and Sutton take us all the way to the bottom of the hill in one fell swoop.

Obviously, Congress will not enact every conceivable harmful mandate that the Martin-Sutton reasoning would authorize. But the risk of abuse is far from purely theoretical, since many interest groups can and will lobby for laws that compel people to purchase their products.

The sweeping congressional power authorized by Martin and Sutton’s opinions makes a hash of the text of the Constitution, which gives Congress the power to regulate interstate and foreign commerce, not a blanket power to mandate anything that has a “substantial” economic effect. It also makes most of the rest of Congress’ Article I powers superfluous. For example, there would be no need for a separate power to tax. After all, failure to give the government some of your money voluntarily surely has substantial economic effects. Therefore, virtually any tax could be imposed through the Commerce Clause, without the need for a separate Tax Clause. Similarly, failure to serve in the armed forces surely has substantial economic effects. The Commerce Clause therefore authorizes Congress to impose a draft and purchase military equipment, thereby making the power to raise armies superfluous.

The Sixth Circuit ruling would be defensible if it were compelled by Supreme Court precedent. However, both Martin and Sutton admit that the Supreme Court has never previously ruled on a case involving a mandate of this type, and has also never previously addressed the issue of whether the Commerce Clause authorizes regulation of inactivity. Therefore, it’s hard to defend their reasoning on the grounds that it was somehow compelled by precedent.

Martin and Sutton also both make the argument that a health insurance mandate is special case because everyone will use health care at some point in their lives. This part of their reasoning adds little to previous statements of the same argument, which I criticized here. It also does not vitiate the radical implications of their rejection of the activity-inactivity distinction, since neither actually concludes that Congress’ power to enact the mandate depends on health care’s supposedly special nature.

Much of Judge Sutton’s Commerce Clause argument relies heavily on the notion that the plaintiffs’ case must fail as a “facial” challenge to the mandate because some possible applications of the law are constitutional even under his interpretation of the plaintiff’s own theory of the case. He leaves the door open to “as-applied” challenges, suggesting that the mandate may still be unconstitutional as applied to people who have not previously purchased health insurance. I may take up this aspect of Sutton’s argument in a follow-up post.

Finally, it’s worth noting that Sutton and Judge Graham both reject the government’s claim that the mandate is a valid exercise of Congress’ power to tax, instead concluding that it is a penalty. Judge Martin avoids addressing this issue directly, but does hold that the mandate is a penalty in the section of his opinion discussing standing. So far, the tax argument has been rejected by every judge who has ruled on it, including those who have upheld the law on other grounds.

My recent op-ed in the Orange County Register explains why. In short, the statute says it’s a “penalty,” not a tax, and United States v. Sonzinsky teaches that courts should not speculate that something which Congress calls a “tax” is really a “penalty”–or vice versa. Besides that, it’s not a consitutional tax because: 1. it’s not a 16th Amendment income tax, because income is an “undeniable accession[] to wealth.” Merely refusing to buy a product is not an “acession to wealth,” but merely a continuation of the status quo. It’s not an excise tax, because such taxes are imposed on an item or activity, and doing nothing is neither. It can’t be a direct tax because it’s not apportioned by population.

For those who may be interested, I have written an amicus brief in Thomas More Law Center v. Obama, one of the cases challenging the constitutionality of the Obama health care bill’s individual mandate. I wrote the brief on behalf of the Washington Legal Foundation and twelve members of the House of Representatives. It is available here. The case is currently before the Sixth Circuit Court of of Appeals.

Because of space constraints, we chose to focus only on the federal government’s two main arguments – the claims that the mandate is justified by Congress’ powers under the Commerce Clause and the Tax Clause. The brief includes a detailed refutation of what has become the government’s central argument under the Commerce Clause: the assertion that the mandate is constitutional because going without health insurance is an “economic decision” (pp. 14-18). I first presented the key arguments in this section right here on the VC, though of course the brief goes into much greater detail.

Although we could not cover the federal government’s Necessary and Proper Clause argument in this brief, it was the main focus of the excellent amicus brief filed by co-blogger Randy Barnett and the Cato Institute. WLF and I presented our own take on the Necessary and Proper Clause issues in the amicus brief I wrote for them and a group of prominent constitutional law scholars in the Virginia anti-mandate case.

The New York Times Room for Debate blog has posted a forum where various scholars weigh in on today’s district court decision striking down the individual mandate. It includes contributions by co-blogger Randy Barnett and myself. My piece briefly discusses the Commerce Clause and Tax Clause aspects of the ruling:

Judge Henry Hudson’s decision today struck down as unconstitutional the “individual mandate” included in the health care bill enacted earlier this year; the mandate requires most Americans to purchase government-approved health insurance plans by 2014. The most powerful parts of Judge Hudson’s ruling reject the federal government’s arguments claiming that the mandate is justified by Congress’ powers to impose taxes and regulate interstate commerce.....

The federal government claims that forcing people to purchase health insurance regulates economic activity because everyone eventually uses health care in some form. But as Judge Hudson points out, “the same reasoning could apply to transportation, housing, or nutritional decisions. This broad definition of the economic activity subject to congressional regulation lacks logical limitation.” The same reasoning would give Congress the power to force everyone to purchase a car because everyone eventually uses some form of “transportation.”

Judge Hudson is equally persuasive in rejecting the argument that the mandate is authorized by Congress’ power to impose taxes. As he notes, it is actually a financial penalty for refusing to comply with a regulation. In September 2009, President Obama himself stated that “to say that you’ve got to take a responsibility to get health insurance is absolutely not a tax increase.” He was right. If the mandate qualifies as a tax merely because it punishes violators with a fine, then Congress could require Americans to do almost anything on pain of having to pay a fine if they refuse.

Yesterday, federal district Judge Norman Moon of the Western District of Virginia upheld the Obamacare individual mandate against a constitutional challenged filed by Liberty University and several private plaintiffs. For the most part, Judge Moon’s reasoning closely follows that of Michigan district Judge George Caram Steeh in the recent Thomas More Law Center decision. Both judges upheld the mandate under the Constitution’s Commerce Clause alone on the grounds that failure to purchase health insurance, even if it doesn’t qualify as “economic activity,” is an “economic decision” that has substantial effects on interstate commerce. I outlined my objections to Judge Steeh’s reasoning here and here, and will not repeat them in detail in this post. Here is the most important flaw:

“Economic decisions,” [Steeh] reasoned, include decisions not to engage in economic activity. This approach would allow the Commerce Clause to cover virtually any choice of any kind. Any decision to do anything is necessarily a decision not to use the same time and effort to engage in “economic activity.”

If I choose to spend an hour sleeping, I necessarily choose not to spend that time working or buying products. Under Judge Steeh’s logic, the Commerce Clause authorizes Congress to force workers to get up earlier in the morning so that they would spend more time on the job.

Judge Moon also contends that the mandate should be upheld under Gonzales v. Raich and Wickard v. Filburn. In reasoning thus, he simply ignores the various ways in which Raich does not in fact cover the mandate case, which I analyzed in detail here. To briefly summarize, Raich gave Congress the power to regulate virtually any kind of “economic activity” and a wide range of “noneconomic” activities, but said absolutely nothing about regulation of inactivity, which is what the mandate does. His reliance on Wickard is even more dubious, since Wickard involved regulation of economic activity narrowly defined (commercial farming); I discuss this point in more detail in my amicus brief on behalf of the Washington Legal Foundation and a group of constitutional law scholars, submitted in the anti-mandate case filed by the state of Virginia (pp. 11-12).

Interestingly, Judge Moon follows Florida District Judge Roger Vinson in ruling that “the better characterization of the exactions imposed under the Act for violations of the employer and individual coverage provisions is that of regulatory penalties, not taxes.” This rejects the federal government’s claim that the mandate should be upheld because it is a tax that Congress has the power to impose under the Tax Clause.

Finally, Moon ruled that both Liberty University and some of the individual plaintiffs have standing. This contributes to an increasing trend under which every judge who has considered the case has ruled that plaintiffs have standing so long as they are state governments, private individuals who do not have health insurance, or employers who do not provide their employees the kind of health insurance benefits that the law requires.

Between this decision and the Michigan case, anti-mandate plaintiffs have now lost the first two district court rulings that addressed the merits of the mandate litigation. However, it is highly likely that they will win at least one and probably both of the next two decisions: those in the cases brought by the Commonwealth of Virginia and a coalition of twenty state governments and the National Federation of Independent Business. Both the Virginia and Florida judges have issued preliminary rulings expressing strong skepticism about the federal government’s arguments. The New York Times reports that the Obama administration expects that there is a high probability that they will lose one or both of these cases at the district level.

As should by now be obvious, no district court is going to resolve this issue definitively. All of these cases will next be addressed by federal courts of appeals. And there is a high likelihood that the matter will ultimately be resolved by the Supreme Court (a virtual certainty if even one federal appellate court strikes down the mandate). If the plaintiffs lose all the district court decisions, that could create momentum for the federal government that will be difficult to overcome. Court of appeals judges might hesitate to upset what would seem like an emerging judicial consensus. Such an outcome is, however, highly unlikely given the situation in the two cases filed by state governments.

I continue to believe that the Supreme Court is more likely to uphold the mandate than strike it down. But the course of the litigation so far shows that there is no consensus on the issue among judges and other experts, and that the plaintiffs have a much better chance of winning than many commentators (myself included) initially thought.

UPDATE: For those interested, the ACA Litigation Blog has a more complete summary of Judge Moon’s ruling that covers various minor issues that I have decided not to include in this post.

There are several interesting aspects of today’s Florida federal district court ruling rejecting the government’s motion to dismiss a challenge to the Obama health care plan’s individual mandate brought by 20 states and the National Federation of Independent Business. First, as Randy Barnett emphasizes, this ruling, like the similar Virginia decision before it, further undercuts claims that the lawsuits against the mandate are either frivolous or clearly precluded by existing precedent. Even the recent Michigan district court ruling upholding the mandate conceded that it was a case of “first impression” (although the judge also tried to argue that the mandate ultimately does fit under current doctrine).

I. Judge Vinson Rules that the Mandate is Not a Tax.

Second, Judge Roger Vinson rejected outright the federal government’s claim that the mandate is a “tax” that is authorized by Congress’ authority under the Tax Clause. Instead, he concludes that it is a regulatory penalty, a point that I emphasized in my amicus brief in the Virginia case on behalf of the Washington Legal Foundation and a group of constitutional law professors:

Because it is called a penalty on its face (and because Congress knew how to say “tax” when it intended to....), it would be improper to inquire as to whether Congress really meant to impose a tax. I will not assume that Congress had an unstated design to act pursuant to its taxing authority, nor will I impute a revenue-generating purpose to the penalty when Congress specifically chose not to provide one. It is “beyond the competency” of this court to question and ascertain whether Congress really meant to do and say something other than what it did.

As the Supreme Court held by necessary implication, this court cannot “undertake, by collateral inquiry as to the measure of the [revenue-raising] effect of a [penalty], to ascribe to Congress an attempt, under the guise of [the Commerce Clause], to exercise another power.” See Sonzinsky, supra, 300 U.S. at 514. This conclusion is further justified in this case since President Obama, who signed the bill into law, has “absolutely” rejected the argument that the penalty is a tax.... To conclude, as I do, that Congress imposed a penalty and not a tax is not merely formalistic hair-splitting. There are clear, important, and well-established differences between the two. See Dep’t of Revenue of Montana v. Kurth Ranch, 511 U.S. 767, 779-80, 114 S. Ct. 1937, 128 L. Ed. 2d 767 (1994) (“Whereas [penalties] are readily characterized as sanctions, taxes are typically different because they are usually motivated by revenue-raising, rather than punitive, purposes.”); Reorganized CF&I Fabricators of Utah, Inc., supra, 518 U.S. at 224 (“‘a tax is a pecuniary burden laid upon individuals or property for the purpose of supporting the Government,’” whereas, “if the concept of penalty means anything, it means punishment for an unlawful act or omission”).

Notice that at least in this instance, President Obama’s preenactment claims that the mandate is not a tax have come back to bite him.

The federal government now will not be able to rely on the tax argument at the summary judgment stage of the litigation before Judge Vinson (though they will of course be able to raise it again on appeal). Judge Vinson concluded that he had to resolves the tax issue at this early stage of the litigation in order to address the federal government’s claim that, because this was a tax case, the court lacked jurisdiction under the Anti-Injunction Act.

II. The Commerce Clause and Necessary and Proper Clause Arguments.

The federal government will, of course, be able to raise their Commerce Clause and Necessary and Proper Clause arguments. Here, too, however, Judge Vinson raised serious doubts about the government’s arguments, even though he emphasized that these issues cannot be fully considered at this stage of the process. In his view, the government’s claim that the mandate is clearly supported by existing precedent in this area is “not even a close call.” He emphasized the novel nature of the mandate:

I have read and am familiar with all the pertinent Commerce Clause cases, from Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 6 L. Ed. 23 (1824), to Gonzales v. Raich, 545 U.S. 1, 125 S. Ct. 2195, 162 L. Ed. 2d 1 (2005). I am also familiar with the relevant Necessary and Proper Clause cases, from M’Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L. Ed. 579 (1819), to United States v. Comstock, — U.S. —, 130 S. Ct. 1949, 176 L. Ed. 2d 878 (2010). This case law is instructive, but ultimately inconclusive because the Commerce Clause and Necessary and Proper Clause have never been applied in such a manner before. The power that the individual mandate seeks to harness is simply without prior precedent.

Vinson’s analysis of the Commerce Clause precedents (pp. 62-64 of his opinion) is very similar to my discussion of them in our amicus brief (Part I), though I don’t claim any direct influence. As Vinson emphasizes, the prior cases “involved activities in which the plaintiffs had chosen to engage. All Congress was doing was saying that if you choose to engage in the activity of operating a motel [Katzenbach v. Heart of Atlanta Motel] or growing wheat [as in Wickard v. Filburn], you are engaging in interstate commerce and subject to federal authority.” In this case, by contrast, “[t]he individual mandate applies across the board. People have no choice and there is no way to avoid it..... It is not based on an activity that they make the choice to undertake. Rather, it is based solely on citizenship and on being alive.” There is a slight error in Vinson’s analysis here. Wickard did not hold that growing wheat for use on a commercial farm was itself “interstate commerce.” Rather, it could be regulated because it was intrastate state economic activity that, in the aggregate, has a “substantial effect” on interstate commerce.

Finally, Judge Vinson ruled that all the plaintiffs had standing (continuing a trend from the previous two cases), dismissed three weak federalism-related claims put forward by the state plaintiffs, and refused to dismiss their claim that the funding provisions of the act violated constitutional restrictions on “coercion” of states through conditional federal spending grants. Vinson concluded that this latter argument was just barely strong enough to get to the summary judgment stage. For reasons I may blog about later, I believe that the states’ coercion argument is correct under the text of the Constitution, but highly unlikely to prevail under current Spending Clause doctrine.

Obviously, this is only a ruling on a motion to dismiss. Judge Vinson could end up accepting the government’s Commerce Clause or Necessary and Proper Clause arguments when he decides later whether to grant summary judgment (though I think that improbable based on what he wrote in today’s opinion). Whatever he decides, the case will be appealed to the Eleventh Circuit Court of Appeals. It is quite likely that the issue will eventually be decided by the Supreme Court. It is still my view that the Court is more likely to uphold the mandate than strike it down, though the latter is far from impossible. That said, today’s ruling is certainly a victory for the anti-mandate plaintiffs.

UPDATE: Orin Kerr asks why Judge Vinson didn’t seriously address the federal government’s Necessary and Proper Clause argument, other than to say that the relevant precedents don’t cover the issues raised by this case. It’s a reasonable question. I agree that he should have focused on it more. On the other hand, it’s important to remember that this was merely a motion for dismissal and he only needed to consider the argument to the extent of showing that the issue can’t be clearly and easily resolved in the federal government’s favor. Moreover, the federal government’s own brief in favor of dismissal gives short shrift to the Necessary and Proper argument (less than 1 page buried near the end of a 50 page brief). The Justice Department instead emphasizes the Commerce Clause and Tax Clause arguments, both of which Vinson considers at length. I suspect Vinson also believed that much of what he said in reference to the Commerce Clause issue also applies to the Necessary and Proper Clause. The opinion (pp. 62-64) seems to consider the two issues in tandem, though this point is not as clear as it should be. In sum, it seems to me that neither Judge Vinson nor the Obama Justice Department shares my and Orin’s view that this is the federal government’s best argument.

My comment on today’s decision, granting the motion to dismiss on some counts, and while allowing other counts to proceed. Like Randy’s comment, my comment is posted on the blog of the site Health Care Lawsuits, which is hosted by the Independent Women’s Forum.

The court entirely rejected the administration’s claim that the penalty for disobeying the mandate is justified under the federal tax power. As the court noted, Congress went out of its way to specify that the penalty is not a tax. Second, the court ruled that it is proper for the plaintiffs to be heard in their challenge to the mandate, which goes into effect in 2014. The court cited extensive precedent showing that when a future harm is certain, courts can act in the present to protect citizens from that harm. The court rejected the argument that the various employer mandates violate the constitutional sovereignty of states; as the court noted, the law simply treats states like other large employers, and so making states provide the same health benefits as other large employers must provide is no different from making states pay the same minimum wage as all other employers.

While federal spending programs may set conditions on grants to states, Supreme Court precedent states that the grants must not be coercive. Here, the court agreed that the states had raised a plausible legal argument which should be allowed to go forward:  the health control presents states with the unacceptable choice of massively increasing their own Medicaid spending on millions of more people, or of losing all funding for the traditional Medicaid program. Finally, the court agreed that the challenge to the individual mandate could go forward, because the mandate was “unprecedented.” Never before has Congress attempted to use its power of regulating interstate commerce to force people to buy a particular product. Because there is no judicial precedent in support of such a mandate, the plaintiffs had raised a plausible constitutional challenge which should be allowed to go forward.

The court’s ruling is not a final decision on the constitutional merits, but it is a solid, meticulously researched, and carefully-reasoned decision declaring that the opponents of the health control law have raised legitimate constitutional objections.

A few days ago I linked to a couple of articles on VAT tax proposals that have been circulating, including an attack by Daniel Mitchell at the Cato site, and a short blog post from Greg Mankiw explaining why, as a replacement for the rest of the tax system, he thought it was a better tax mechanism, as well as being the functional equivalent of certain versions of the flat tax.

I received several interesting emails from tax professors in response.  One pointed to a paper very much on the point of the post by Brian D. Galle, Hidden Taxes, upcoming in Washington University Law Journal; the SSRN abstract says:

The idea of hidden taxes is as old as John Stuart Mill, but convincing evidence of their existence is new. In this Article, I survey and critique recent studies that claim to show that there are some taxes that can go unnoticed by those who pay them. I also develop the array of unanswered theoretical questions and policy implications that potentially follow from the studies’ results.

Probably the central question for hidden taxes is whether they might enable government to raise revenue without also distorting the economy. If so, I argue, they have the potential to radically refashion the architecture of redistributive government. But, as I also show, whether that is true turns on the cognitive mechanisms that might permit taxes to go unnoticed. For example, if hidden taxes are caused not by rational ignorance but by cognitive shortcomings, then it is likely that the burden of a hidden tax will be borne disproportionately by poorer taxpayers, and vice-versa. Thus, I attempt to integrate with the tax literature some recent developments in our understanding of bounded rationality in consumers more generally.

But I also received an email from a friend and colleague on my own Washington College of Law faculty, tax professor Benjamin Leff.  (Ben is a junior – ie, untenured – professor, and he had some hesitation about putting out views on a blog.  I assured him that people understand that this is informal, first draft discussion, not a final academic or scholarly product, and moreover, it is a space to think about the political ramifications of various policy positions, in ways that one might not think appropriate for a scholarly paper.)  I’m delighted to say that Ben is letting me put up his remarks as an embedded guest post, and my thanks to him for taking this up:

Your post on why the “hiddeness” of a VAT tax is “a bug, not a feature” was very interesting. Basically, if I understand correctly, you’re dipping into an old argument about the relevance of tax “salience.” The argument you’re making is that a less salient tax (a more “hidden” one) creates a public choice problem, because it enables policy-makers to tax more with less protest from the taxed. The implication is that if the people fully felt the sting of the taxes they pay, they would do the hard work of cutting government spending down to optimal levels, rather than overspending as they currently do (if they do). Thus, if a VAT were passed, and if it had the benefit of being less salient than current taxes, it would permit additional spending by the government.

I think the most common answer given to your argument currently is that the discovery of limitless deficit spending put an end to plausibility of the “starve the beast” argument you’re making. In other words, the link between taxing, voting, and spending that you propose is broken by the option of neither taxing nor reducing expenditures. That seems convincing to me, but I have no special knowledge about it. In recent memory, tax cutting has not generally been accompanied by reduced government spending, but obviously that doesn’t really prove anything. At root, it’s an empirical question: if a VAT were introduced, would the government use the revenue generated to (1) reduce non-VAT federal taxes (keeping overall revenue neutral); (2) reduce the deficit; or (3) increase federal spending. That question may or may not have anything to do with how “hidden” a VAT is. It may have more to do with the public debate that supports the imposition of a VAT, the intentions of Congress in enacting it, and the continuing commitment in Congress to whatever choices made with regards to spending and deficits.

But, more important than whether the argument is convincing or not, I think, is some context for it. You describe “hiddeness” as a feature that makes a VAT “particularly special” among tax mechanisms, but that’s not really true. We currently have a broad range of “salience” in the federal taxes that are imposed. What is especially problematic from a public choice perspective in the current system is that the “hidden” taxes appear to be disproportionately borne by wage earners. Therefore, as wealth increases (generally), one’s sense of being taxed increases more sharply than one’s actual tax burden. That is, (again, generally) rich people think they’re more taxed than they are and working people think they’re less taxed than they are. That’s a distributional public choice problem, and I think it should be clear why a distributional public choice problem would do more damage to the political process than a general one.

The “hiddeness” of wage-earners’ taxes is generally caused by two phenomena. First, wage-earners pay flat payroll taxes (generally social security and medicare), which is 7.65 percent of their income right out of their paycheck. This largely invisible (as evidenced by the fact that some of your commenters said that the bottom half of the country pays no federal tax, when in fact the vast majority of that bottom half pay a relatively steep flat tax on their very first dollar earned). But it’s not completely invisible, because at least it shows up on their paychecks and decreases their stated wage. But payroll taxes are even more invisible than that because employers are paying an additional 7.65% on their employee’s wages that doesn’t even get reported to them. There may be some argument about what the incidence of that tax is, but the consensus is that it falls at least substantially on labor. In other words, every employee in the country pays a flat 15.3% tax on their first dollar earned. Commentators often ignore it or are confused about it (especially conservative commentators who want to claim, falsely, that working people don’t pay federal taxes). Oops, I forgot to mention that it’s not a flat tax. It’s a regressive tax, because (at least for the social security component) once you earn above a ceiling ($106,800) the tax disappears.

The second factor that “hides” the taxes paid by working people is withholding. Because of withholding, wage earners often experience taxes as a refund, rather than an expense. When it was introduced, the biggest argument against withholding was exactly the argument you are making – that it’s a public choice problem to hide taxes. Many would argue that the biggest reason why our tax system can work at all is because of the withholding system. So, if you’re afraid of hidden taxes, the game has already been played (at least for the vast majority of Americans who are employees). Then the question if you’re still committed to “visible” taxes is whether a VAT is more or less hidden that withheld wages.

Thus, there’s currently a distributional problem with the federal tax system, because high-income taxpayers generally pay visible taxes, while low/middle-income taxpayers generally pay invisible ones. Because a VAT taxes only consumption, and exempts income from capital, it is yet another “hidden” tax primarily on wage earners, exacerbating the distributional salience problem that already exists in our current system. But if you think that the point of an income tax is to roughly measure “ability to pay” (as I and other liberals generally do), then you will be unhappy with a VAT not primarily because it is more or less “hidden” than current federal taxes, but because it actually increases the tax burden on wage earners while decreasing the burden on the wealthy. My view is that because a VAT excludes from tax income from investments, an income tax does a better job of tracking “ability to pay,” which is the cornerstone of an equitable tax system. But that discussion is well beyond the scope of your post.

All that to one side, though, what I think makes your post interesting to think about has to be the sharpness of the opposition of the “public choice” argument to the “economic” one, because your readers may be drawn to both. The way you cast it, the public choice argument seems infuriating to economists (or anyone who cares at all about economics), as you point out, because (generally) everything that makes a tax “efficient” also makes it less visible. And so, under the public choice argument – assuming that you thought that government spending is bad – the best tax would be the least efficient one. The more a tax changed market choices, the more it would “sting” (by thwarting one’s desires) and therefore, the more likely it would be to encourage the populace to reduce taxes. That should be true of spending programs too, by the way. If you’re opposed to government spending, then the worst possible thing is efficient government spending that really makes people’s lives better. You should be promoting wasteful spending that messes people up as much as possible. That is to say, if you’re looking for a revolution, make the current system work as badly as possible.

But on reflection, the economic argument and the public choice argument are not actually so opposed. Because, according to the economic argument (at least the welfarist economic argument), the government should do what it is most efficient for it to do to provide for the greatest happiness. So, if many things are public goods, for example, which are likely to be undersupplied by the market, then as an economist, you should not be for reduced government spending, but for spending sufficient to supply those public goods. You should be for exactly the right amount of government spending. It’s not a foregone conclusion, then, that we have excessive government spending, though we may be spending on the wrong things. Then you have a much more nuanced “salience” question. Taxes should be exactly “hidden” enough to permit people to make the right choices about how much government spending there ought to be. You have a problem of baseline, though. What is “the right” amount of hiddeness?

(Corrected, and thanks to commenter for pointing it out, to shift the last paragraph from Galle’s abstract from Ben’s discussion, where it wound up accidentally, back to Galle’s abstract.)